GSE Mid-Year 2023 Outlook Series: Freddie Mac

August 24, 2023

GSE Mid-Year 2023 Outlook Series: Freddie Mac

According to Freddie Mac's 2023 Midyear Multifamily Outlook, there is promising news for the multifamily sector. There has been a return to normal seasonal patterns following declines in 2022. Rental demand has re-emerged, marked by modest rent growth and steady occupancy rates. Despite slower growth and high interest rates pressuring property prices, the multifamily market remains a favored asset class, adapting to both immediate challenges and long-term trends, such as Generation Z's influence and a robust labor market.

Vacancy rates have slowed their increase in the first half of 2023, and by the second quarter, they have flattened, reflecting more average, long-term rates. The expectations for multifamily fundamentals in 2023 are slightly below long-term averages, a pace that may feel slow in comparison to the rapid growth witnessed during the pandemic.

Since 2022, cap rates have been rising slowly, and interest rates remain high, causing tight cap rate spreads. The upward pressure on cap rates has, in turn, placed downward pressure on property prices, with declines seen year-over-year for the first time since 2010. Origination volume in 2023 is expected to fall by 17% compared to 2022, amounting to around $370 billion this year.

Following a decline of 1.7% in the final months of 2022, rent growth rebounded in the first half of 2023, with increases reported by both RealPage and Reis, following typical seasonal patterns. However, the growth has been weak compared to previous years, totaling 1.5% nationally as of June 2023, below the annual average growth seen from 2000-2022. The national occupancy rate also fell sharply from record highs of about 97% to 94.7% in 12 months but has started to stabilize. The slowdown in rents at the end of 2022 was due to a decline in demand. Demand returned weakly in the first half of 2023, with just under 100,000 units. A decline in demand towards the end of 2022 can be attributed to a slowdown in household formations, with fewer households being created in 2023 as compared to the previous year.

The overall forecast for 2023 seems relatively stable for the multifamily market, with expected vacancy rates and rent growth closely aligned with historical averages. However, some uncertainty remains due to possible economic slowdowns and elevated new supply levels. The expected gross income growth rate is slightly below average, possibly due to these factors.

The forecast anticipates vacancies ending at 5.1% and rent growth totaling 3.1% for the year, with gross income growth at 2.8%. These figures are average for vacancy levels but below annual average for rent growth, and 100 bps lower than the historical average for income growth. Factors contributing to this include continued job creation, stable household income growth, downward inflation, and slower economic growth. However, there's a risk of a recession, and if assumptions fail, the high levels of new supply combined with sagging demand may lead to lower multifamily market performance.

If a recession occurs, Moody's expects it to be mild, and multifamily performance would likely be in a similar range to previous slowdowns. Alternatively, stronger-than-expected income growth could push rent growth higher, absorbing high levels of new supply. The ongoing monitoring of the economic and labor market conditions, interest rates, and other factors are essential in understanding and forecasting the multifamily market trends.

Ultimately, the multifamily market in 2023 is shaped by a mix of continued construction in top markets, emerging growth in smaller regions, and economic factors that contribute to a somewhat uncertain, yet largely stable outlook. The focus on top markets and careful analysis of economic indicators will continue to be critical for investors and stakeholders in the multifamily housing sector going forward.